Planning Matters

Editor’s note: This month Give & Take asked Jonathan Tidd, a noted attorney who specializes in advising nonprofits on legal matters related to charitable gifts, to comment on common legal and ethical issues that can arise when charities are asked to help donors in completing their gifts.

Ethics and charitable giving: It’s like trying to put your arms around a building. The subject is much too large and complex to be encompassed simply.

Consider, for example, these commonplace actions of gift officers and charities:

Issuing a gift receipt for a gift of stock made via DTC (depository trust company) transfer—a receipt that states a single value for the stock

Issuing to a gift annuity donor a letter telling her what her charitable deduction will be

Advising a prospective charitable remainder trust donor in writing as to the tax consequences of the proposed trust

Consider the DTC stock gift

There is, despite what many think, no clear rule here as to when the gift is complete for tax purposes. Is it the date the donee organization receives the stock? Or is it the date the stock is wired out of the donor’s account? In today’s volatile equity markets, the value may be very different depending on which is the correct date.

There is, unfortunately, no court case, Treasury regulation, or ruling on this point. So to place a value (i.e., a single value) on a gift receipt for a gift of DTC stock is in effect to give legal advice to the donor, because the donor will surely take that value and run with it (unless the donor wants to argue about the right value, in which case the development officer at the other end of the argument is in a losing position no matter what, because arguing the law with donors is always a losing proposition, even if the development officer is right).

So in this case we’ve got a complex mix of law and ethics. But there is a way out. It’s to put on the gift receipt a statement that the value shown is not necessarily the amount of the donor’s tax deduction for the gift, and that the donor needs to check with his or her own tax advisor as to how to claim the gift for tax purposes.

Please note, however, that according to IRS regulations, a gift receipt for a non-cash gift need not state a value and donors can be advised to determine the gift’s value for tax purposes in consultation with their accountant, financial services provider, and/or other advisors.

The charitable deduction problem

Let’s consider sending the gift annuity donor a letter telling her what her charitable deduction will be for setting up the annuity. What’s wrong with this? The computer software provides the correct deduction figure, doesn’t it?

Well, maybe. But then again, maybe not. After all, the donor’s overall federal income tax charitable deduction for the year is subject to various limitations. In addition, there’s the matter of the IRS discount rate used by the software. Keep in mind that the donor can elect to use the discount rate for one of the two months preceding the gift month if he or she then makes the proper election on the tax return.

So giving the gift annuity donor a charitable deduction figure without also providing some carefully worded caveats is not the right thing to do, legally or ethically.

What about advising the CRT donor as to tax consequences?

No matter what the situation, it is not legally or ethically appropriate for a development officer, no matter how knowledgeable he or she is, even if he or she is a lawyer, to advise donors or prospective donors as to anything, other than as to the donee organization’s policies, such as its willingness to serve as a trustee or gift crediting.

Providing information is one thing. Advising—that is, giving tax or other legal advice—is quite another. Many donors want advice from their donee organizations. Gift officers must resist this pull while still being helpful. There is a fine line here.

Anticipating problems

What emerges so far are two important points: 1) In the gift planning arena, it is better by far to anticipate and thereby avoid problems rather than to try to solve problems that have arisen. 2) Part of avoiding problems is being careful, disciplined, and precise in the use of language, both spoken and written.

The moral component

So far, we’ve looked at problems we can think of as being ethical in nature but which are actually rooted in the law. Some ethical problems in the gift planning environment, while having a legal dimension, also have a very strong moral component.

For example, a development officer is working with an elderly individual who places absolute trust in the development officer and who is looking to the development officer to guide her in making the best decision as to how to make a sizable “life income” gift. The development officer is convinced the gift annuity is the best gift plan from the donor’s standpoint. The development officer’s CEO and business officer want the development officer to heavily promote the use of a charitable remainder annuity trust (CRAT), which puts the donee organization at less risk while placing the donor at a higher risk of corpus exhaustion that could result in cessation of payments to her.

This is a difficult situation for the development officer, because after all, he or she does owe a duty of loyalty to his or her employer. It is a clear conflict-of-interest situation. The only good way to play this one ethically is to try to bring a competent advisor (attorney or accountant, for example) into the picture on the donor’s side of the fence, so that the development officer can do his or her job while being assured the donor’s interests are adequately and independently represented.

Are there any gift situations free of ethical considerations?

There are, but they are few and far between. So how should a gift officer deal with this fact? We know good intentions are important, but we also know the road to perdition is paved with such intentions. The best approach is a reflective, mindful approach, in which acting in rote fashion is set aside always in favor of asking oneself the right questions. To grow as a development officer is to keep getting better at asking those questions—and learning where to go for answers.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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